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Focus Financial Partners Reports Second Quarter 2019 Results

Year-Over-Year Revenue Growth above 30%
for the Fifth Consecutive Quarter Reporting as a Public Company
Growth Supported by Strong M&A Activity

NEW YORK, Aug. 08, 2019 (GLOBE NEWSWIRE) -- Focus Financial Partners Inc. (FOCS) (“Focus Inc.”, “Focus”, the “Company”, “we”, “us” or “our”), a leading partnership of independent, fiduciary wealth management firms, today reported results for its second quarter ended June 30, 2019.

Second Quarter 2019 Highlights

  • Total revenues of $301.5 million, reflecting year-over-year growth of 30.3%
  • Organic revenue growth(1) rate of 18% year-over-year
  • GAAP net income of $3.1 million
  • GAAP basic and diluted net income per share of $0.02
  • Adjusted Net Income(2) of $41.2 million, 42.1% higher than the prior year quarter
  • Adjusted Net Income Per Share(2) of $0.55, reflecting year-over-year growth of 37.5%
  • Closed on two new partner firms, added acquired base earnings(1) of $6.7 million
  • Closed on nine mergers for existing partner firms
     
  1. Please see footnotes 2 and 6 under “How We Evaluate Our Business” later in this press release
  2. Non-GAAP financial measures. Please see “Reconciliation of Non-GAAP Financial Measures” later in this press release for a reconciliation and more information on these measures.

“We had an excellent second quarter and first half of 2019, characterized by the strong performance of our partner firms and access to highly attractive opportunities to deploy our capital,” said Rudy Adolf, Founder, CEO and Chairman. “Our model continues to resonate with wealth management firms and our momentum is excellent. We participate in a multi-trillion dollar industry that is experiencing rapid secular growth and consolidation. We are a significant beneficiary and driver of this evolution because we have the advantage of a long-standing track record and access to inexpensive debt capital, as well as industry-leading M&A expertise and the benefits of scale. We believe that we have established a unique position in this market with an enviable partnership of firms. We are excited about the future of our business.”

“Our business again generated year-over-year growth in excess of 30% for revenues and adjusted net income per share, well above our stated annual targets of 20% for each,” said Jim Shanahan, Chief Financial Officer. “Our IPO further raised our visibility, generating a far greater number of M&A opportunities than we had initially anticipated. We are capitalizing on these transactions because they represent substantial future growth and diversification benefits for our business, in turn creating attractive, incremental value for our shareholders. Year-to-date through August 8th, we closed 30 transactions, including 6 direct acquisitions and 24 mergers. We have already exceeded our 2018 full-year deal volume by 20% and our second half transactional momentum remains strong.”

Presentation

This press release presents our results of operations and financial position, including consolidation of our investment in Focus Financial Partners, LLC (“Focus LLC”), since July 30, 2018.  Prior to July 30, 2018, the closing date of our initial public offering (“IPO”), the financial statements included herein represent those of Focus LLC. The financial results of Focus Inc. prior to July 30, 2018 have not been included in these financial statements as it had not engaged in any business activities during such period. Accordingly, these results do not purport to reflect what the results of operations of Focus Inc. would have been had Focus Inc.’s IPO and related transactions occurred prior to July 30, 2018.

2019 Second Quarter Financial Highlights

Total revenues were $301.5 million, 30.3%, or $70.1 million higher than the second quarter of the prior year.  The primary driver of this increase was revenue growth from our existing partner firms of approximately $41.5 million. The majority of this growth was the result of higher wealth management fees, which included the effect of mergers completed by our partner firms in the last twelve months. The balance of the increase of $28.6 million was due to revenue from new partner firms acquired over the twelve months ended June 30, 2019.

An estimated 70%, or approximately $212.2 million, of revenues were correlated to the financial markets, primarily equities and fixed income, of which 70%, or approximately $148.1 million, were generated from advance billings. The remaining 30%, or approximately $89.3 million, of revenues were not correlated to the markets. These revenues typically consist of fixed fees for investment advice, tax fees and family office type services, primarily for high and ultra-high net worth clients. In excess of 95% of total revenues were fee-based and recurring.

Organic revenue growth(1) was 18.0%, higher than the 16.7% for the prior year quarter, reflecting the positive impact of the 27 mergers we have completed since July 1, 2018. We anticipate that our organic revenue growth for the third quarter of 2019 will be in excess of 15%.

GAAP net income increased to $3.1 million compared to a net loss of $7.7 million in the prior year quarter. Adjusted Net Income(2) was $41.2 million, an increase of 42.1%, or $12.2 million over the prior year quarter. Adjusted Net Income Per Share(2) was $0.55 per share, $0.15, or 37.5%, higher year-over-year, reflecting acquisition activity completed over the past year as well as strong organic growth and the net reduction in interest expense primarily related to the repayment of our $207.0 million Second Lien Term Loan in July 2018.

2019 First Half Financial Highlights

Total revenues were $561.5 million, 31.3%, or $133.8 million higher than the first six months of the prior year. The primary driver of this increase was revenue growth from our existing partner firms of approximately $88.2 million. The majority of this growth was the result of higher wealth management fees, which include the effect of mergers completed by our partner firms in the last twelve months, as well as a full period of revenue recognized during the first half of 2019 for partner firms that were acquired in the first half of 2018. The balance of the increase of $45.6 million was due to revenue from new partner firms acquired over the twelve months ended June 30, 2019.

Organic revenue growth(1) was 11.0%, compared to 16.9% for the prior year period. Organic growth in the first half of 2019 was strong despite the effect of the 2018 fourth quarter decline in the financial markets and the advanced billing structure utilized by certain of our partner firms.

GAAP net income increased to $0.3 million compared to a net loss of $19.7 million in the prior year period. Adjusted Net Income(2) was $76.9 million, an increase of 41.3%, or $22.5 million over the prior year period. Adjusted Net Income Per Share(2) was $1.03 per share, $0.27, or 35.5%, higher year-over-year, reflecting acquisition activity completed over the past year as well as strong organic growth and the net reduction in interest expense primarily related to the repayment of our $207.0 million Second Lien Term Loan in July 2018.

  1. Please see footnote 2 under “How We Evaluate Our Business” later in this press release.
  2. Non-GAAP financial measures. Please see “Reconciliation of Non-GAAP Financial Measures” later in this press release for a reconciliation and more information on these measures.

Balance Sheet and Liquidity

As of June 30, 2019, cash and cash equivalents were $37.9 million and debt outstanding under the Company’s credit facilities was approximately $1.1 billion.

Of the total debt outstanding as of June 30, 2019, approximately $795.0 million were borrowings under our First Lien Term Loan (“Term Loan”) and $320.0 million were borrowings under our First Lien Revolver (“Revolver”). Our net leverage ratio at June 30, 2019 was 4.05x, reflecting our continued strong M&A momentum during the second quarter.

At the end of July 2019, we took advantage of the positive credit environment and closed on an incremental $350.0 million Term Loan (upsized by $50 million as a result of strong lender demand), the proceeds of which were used to reset our Revolver dry powder for M&A activity. There were no changes to the existing terms of our Term Loan or Revolver as a result of this transaction, other than an increase in the Term Loan quarterly amortization payment from $2.0 million to $2.9 million. While we continue to prudently manage our credit and leverage profile, this transaction will increase our flexibility to capitalize on the secular tailwinds shaping the RIA industry and position our business for future growth.

Teleconference, Webcast and Presentation Information

Founder, CEO and Chairman, Rudy Adolf, and Chief Financial Officer, Jim Shanahan, will host a conference call today, August 8, 2019 at 8:30 a.m. Eastern Time to discuss the Company’s 2019 second quarter results and outlook. The call can be accessed by dialing +1-877-504-6131 (inside the U.S.) or +1-786-815-8445 (outside the U.S.) and entering the passcode 7789612.

A live, listen-only webcast, together with a slide presentation titled “2019 Second Quarter Earnings Release Supplement” dated August 8, 2019, will be available under “Events” in the “Investor Relations” section of the Company’s website, www.focusfinancialpartners.com. A webcast replay of the call will be available shortly after the event at the same address. 

About Focus Financial Partners Inc.

Focus Financial Partners is a leading partnership of independent, fiduciary wealth management firms. Focus provides access to best practices, resources, and continuity planning for its partner firms who serve individuals, families, employers and institutions with comprehensive wealth management services. Focus partner firms maintain their operational independence, while they benefit from the synergies, scale, economics and best practices offered by Focus to achieve their business objectives.

Cautionary Note Concerning Forward-Looking Statements

The foregoing information contains certain forward-looking statements that reflect the Company's current views with respect to certain current and future events and financial performance. These forward-looking statements are and will be, as the case may be, subject to many risks, uncertainties and factors relating to the Company's operations and business environment which may cause the Company's actual results to be materially different from any future results, expressed or implied, in these forward-looking statements. Any forward-looking statements in this release are based upon information available to the Company on the date of this release. The Company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any statements expressed or implied therein will not be realized. Additional information on risk factors that could potentially affect the Company's financial results may be found in the Company's annual report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission.

Investor and Media Contact Information

Tina Madon
Head of Investor Relations & Corporate Communications
Tel: (646) 813-2909
tmadon@focuspartners.com


How We Evaluate Our Business

We focus on several key financial metrics in evaluating the success of our business, the success of our partner firms and our resulting financial position and operating performance. Key metrics for the three and six months ended June 30, 2018 and 2019 include the following: 

  Three Months Ended   Six Months Ended
  June 30,   June 30,
    2018       2019       2018       2019  
  (dollars in thousands, except share and per share data)
Revenue Metrics:              
Revenues $   231,435    $   301,545    $   427,664    $   561,469 
Revenue growth (1) from prior period    47.2%     30.3%     46.1%     31.3%
Organic revenue growth (2) from prior period   16.7%     18.0%     16.9%     11.0%
               
Management Fees Metrics (operating expense):              
Management fees $   60,559    $   79,252    $   106,859    $   136,258 
Management fees growth (3) from prior period    53.1%     30.9%     46.8%     27.5%
Organic management fees growth (4) from prior period    22.1%     16.5%     22.4%     6.6%
               
Adjusted EBITDA Metrics:              
Adjusted EBITDA (5) $   51,890    $   62,953    $   96,111    $   117,467 
Adjusted EBITDA growth (5) from prior period   58.9%     21.3%     58.0%     22.2%
               
Adjusted Net Income Metrics:              
Adjusted Net Income (5)  $   29,012    $   41,232    $   54,468    $   76,946 
Adjusted Net Income growth (5) from prior period    37.6%     42.1%     38.1%     41.3%
               
Adjusted Net Income Per Share Metrics:              
Adjusted Net Income Per Share (5) $   0.40    $   0.55    $   0.76    $   1.03 
Adjusted Net Income Per Share growth (5) from prior period   37.6%     37.5%     38.1%     35.5%
Adjusted Shares Outstanding (5)   71,843,916      74,444,102      71,843,916      74,422,405 
               
Other Metrics:              
Acquired Base Earnings (6) $   23,800    $   6,725    $   26,550    $   18,638 
Number of partner firms at period end (7)     56        62        56        62 

 

  1. Represents period-over-period growth in our GAAP revenue.
  2. Organic revenue growth represents the period-over-period growth in revenue related to partner firms, including growth related to acquisitions of wealth management practices and customer relationships by our partner firms and partner firms that have merged, that for the entire periods presented, are included in our consolidated statements of operations for each of the entire periods presented. We believe these growth statistics are useful in that they present full-period revenue growth of partner firms on a ‘‘same store’’ basis exclusive of the effect of the partial period results of partner firms that are acquired during the comparable periods.
  3. The terms of our management agreements entitle the management companies to management fees typically consisting of all Earnings Before Partner Compensation (“EBPC”) in excess of Base Earnings up to Target Earnings, plus a percentage of any EBPC in excess of Target Earnings. Management fees growth represents the growth in GAAP management fees earned by management companies. While an expense, we believe that growth in management fees reflect the strength of the partnership.
  4. Organic management fee growth represents the period-over-period growth in management fees earned by management companies related to partner firms, including growth related to acquisitions of wealth management practices and customer relationships by our partner firms and partner firms that have merged, that for the entire periods presented, are included in our consolidated statements of operations for each of the entire periods presented.  We believe that these growth statistics are useful in that they present full-period growth of management fees on a ‘‘same store’’ basis exclusive of the effect of the partial period results of partner firms that are acquired during the comparable periods.
  5. For additional information regarding Adjusted EBITDA, Adjusted Net Income, Adjusted Net Income Per Share and Adjusted Shares Outstanding, including a reconciliation of Adjusted EBITDA, Adjusted Net Income and Adjusted Net Income Per Share to the most directly comparable GAAP financial measure, please read ‘‘Reconciliation of Non-GAAP Financial Measures—Adjusted EBITDA’’ and ‘‘Reconciliation of Non-GAAP Financial Measures —Adjusted Net Income and Adjusted Net Income Per Share’’.
  6. The terms of our management agreements entitle the management companies to management fees typically consisting of all future EBPC of the acquired wealth management firm in excess of Base Earnings up to Target Earnings, plus a percentage of any EBPC in excess of Target Earnings. Acquired Base Earnings is equal to our retained cumulative preferred position in Base Earnings. We are entitled to receive these earnings notwithstanding any earnings that we are entitled to receive in excess of Target Earnings. Base Earnings may change in future periods for various business or contractual matters. For example, from time to time when a partner firm consummates an acquisition, the management agreement among the partner firm, the management company and the principals is amended to adjust Base Earnings and Target Earnings to reflect the projected post-acquisition earnings of the partner firm.
  7. Represents the number of partner firms on the last day of the period presented. The number includes new partner firms acquired during the period reduced by any partner firms that merged with existing partner firms prior to the last day of the period.  

 

FOCUS FINANCIAL PARTNERS INC.
Unaudited condensed consolidated statements of operations
(In thousands, except share and per share data)
                 
    Three Months Ended   Six Months Ended
  June 30,   June 30,
      2018       2019       2018       2019  
REVENUES:                
Wealth management fees   $   216,328     $   283,296     $   400,651     $   526,380  
Other     15,107       18,249       27,013       35,089  
Total revenues     231,435       301,545       427,664       561,469  
OPERATING EXPENSES:                
Compensation and related expenses      81,273       105,531       154,622       206,979  
Management fees      60,559       79,252       106,859       136,258  
Selling, general and administrative      41,493       59,736       77,780       111,993  
Management contract buyout                       1,428  
Intangible amortization      22,290       31,221       41,784       59,962  
Non-cash changes in fair value of estimated
  contingent consideration
    11,944       3,847       18,315       11,261  
Depreciation and other amortization      2,162       2,425       4,044       4,738  
Total operating expenses     219,721       282,012       403,404       532,619  
INCOME FROM OPERATIONS      11,714       19,533       24,260       28,850  
OTHER INCOME (EXPENSE):                
Interest income      235       339       377       536  
Interest expense      (18,212 )     (14,424 )     (32,484 )     (27,283 )
Amortization of debt financing costs      (929 )     (782 )     (1,888 )     (1,564 )
Gain on sale of investment                  5,509        
Loss on extinguishment of borrowings                  (14,011 )      
Other income (expense) —net      203       (468 )     296       (704 )
Income from equity method investments      79       329       153       643  
Total other expense—net      (18,624 )     (15,006 )     (42,048 )     (28,372 )
INCOME (LOSS) BEFORE INCOME TAX      (6,910 )     4,527       (17,788 )     478  
INCOME TAX EXPENSE     746       1,425       1,922       204  
NET INCOME (LOSS)   $   (7,656 )     3,102     $   (19,710 )     274  
Non-controlling interest           (2,306 )           (2,420 )
NET INCOME (LOSS) ATTRIBUTABLE TO                 
COMMON SHAREHOLDERS       $   796         $   (2,146 )
                 
Income (loss) per share of Class A common stock:              
Basic       $   0.02         $   (0.05 )
Diluted       $   0.02         $   (0.05 )
                 
Weighted average shares of Class A common                
stock outstanding:                
Basic          46,696,200            46,455,238  
Diluted          46,721,559            46,455,238  
                 

 

FOCUS FINANCIAL PARTNERS INC.  
Unaudited condensed consolidated balance sheets  
(In thousands, except share and per share data)  
  December 31,    June 30,  
  2018       2019    
ASSETS        
Cash and cash equivalents $   33,213     $   37,944    
Accounts receivable less allowances of $576 at 2018 and $785 at 2019   98,596       118,674    
Prepaid expenses and other assets   76,150       70,950    
Fixed assets—net    24,780       34,363    
Operating lease assets         168,867    
Debt financing costs—net    12,340       10,993    
Deferred tax assets—net   70,009       77,045    
Goodwill    860,495       988,706    
Other intangible assets—net    762,195       913,110    
TOTAL ASSETS  $   1,937,778     $   2,420,652    
LIABILITIES AND EQUITY        
LIABILITIES        
Accounts payable  $   8,935     $   12,216    
Accrued expenses    36,252       45,456    
Due to affiliates   39,621       23,156    
Deferred revenue    6,215       6,183    
Other liabilities    158,497       178,016    
Operating lease liabilities         180,451    
Borrowings under credit facilities (stated value of $838,985 and $1,114,970
  at December 31, 2018 and June 30, 2019, respectively)
  836,582       1,112,784    
Tax receivable agreements obligation   39,156       46,535    
TOTAL LIABILITIES    1,125,258       1,604,797    
EQUITY        
Class A common stock, par value $0.01, 500,000,000 shares authorized;
  46,265,903 and 47,116,817 shares issued and outstanding at
  December 31, 2018 and June 30, 2019, respectively
  462       471    
Class B common stock, par value $0.01, 500,000,000 shares authorized;
  22,823,272 and 22,308,446 shares issued and outstanding at
  December 31, 2018 and June 30, 2019, respectively
  228       223    
Additional paid-in capital   471,386       489,566    
Accumulated deficit   (590 )     (2,736 )  
Accumulated other comprehensive loss   (1,824 )     (2,000 )  
Total shareholders' equity   469,662       485,524    
Non-controlling interest   342,858       330,331    
Total equity   812,520       815,855    
TOTAL LIABILITIES AND EQUITY $   1,937,778     $   2,420,652    
         

 

FOCUS FINANCIAL PARTNERS INC.  
Unaudited condensed consolidated statements of cash flows  
(In thousands)  
  Six Months Ended  
June 30,  
    2018       2019    
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net income (loss) $   (19,710 )   $   274    
Adjustments to reconcile net income (loss) to net cash provided by operating        
activities—net of effect of acquisitions:        
Intangible amortization     41,784       59,962    
Depreciation and other amortization    4,044       4,738    
Amortization of debt financing costs   1,888       1,564    
Non-cash equity compensation expense    7,555       9,099    
Non-cash changes in fair value of estimated contingent consideration   18,315       11,261    
Income from equity method investments   (153 )     (643 )  
Distributions received from equity method investments    613       618    
Other non-cash items    (203 )     843    
Loss on extinguishment of borrowings   14,011          
Changes in cash resulting from changes in operating assets and liabilities:        
Accounts receivable   (21,467 )     (18,219 )  
Prepaid expenses and other assets   (14,791 )     3,220    
Accounts payable    3,324       389    
Accrued expenses    12,358       25,166    
Due to affiliates    (7,548 )     (16,518 )  
Other liabilities    (2,600 )     (24,848 )  
Deferred revenue   (268 )     (1,688 )  
Net cash provided by operating activities   37,152       55,218    
CASH FLOWS FROM INVESTING ACTIVITIES:        
Cash paid for acquisitions and contingent consideration—net of cash acquired   (215,332 )     (289,101 )  
Purchase of fixed assets    (4,429 )     (10,060 )  
Investment and other    (24,300 )        
Net cash used in investing activities    (244,061 )     (299,161 )  
CASH FLOWS FROM FINANCING ACTIVITIES:        
Borrowings under credit facilities    200,000       370,000    
Repayments of borrowings under credit facilities    (4,477 )     (94,014 )  
Contingent consideration paid    (4,814 )     (16,293 )  
Payments of debt financing costs    (1,981 )        
Proceeds from exercise of stock options         796    
Payments on finance lease obligations   (116 )     (94 )  
Distributions for unitholders    (506 )     (11,734 )  
Net cash provided by financing activities    188,106       248,661    
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS   (80 )     13    
CHANGE IN CASH AND CASH EQUIVALENTS   (18,883 )     4,731    
CASH AND CASH EQUIVALENTS:        
Beginning of period   51,455       33,213    
End of period $   32,572     $   37,944    
         


Reconciliation of Non-GAAP Financial Measures

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP measure. Adjusted EBITDA is defined as net income (loss) excluding interest income, interest expense, income tax expense (benefit), amortization of debt financing costs, intangible amortization and impairments, if any, depreciation and other amortization, non-cash equity compensation expense, non-cash changes in fair value of estimated contingent consideration, gain on sale of investment, loss on extinguishment of borrowings, other expense/income, net, other one-time transaction expenses, and management contract buyout, if any. We believe that Adjusted EBITDA, viewed in addition to and not in lieu of, our reported GAAP results, provides additional useful information to investors regarding our performance and overall results of operations for various reasons, including the following:

  • Non-cash equity grants made to employees or non-employees at a certain price and point in time do not necessarily reflect how our business is performing at any particular time; stock-based compensation expense is not a key measure of our operating performance;
  • Contingent consideration or earn outs can vary substantially from company to company and depending upon each company’s growth metrics and accounting assumption methods, the non-cash changes in fair value of estimated contingent consideration is not considered a key measure in comparing our operating performance; and
  • Amortization expenses can vary substantially from company to company and from period to period depending upon each company’s financing and accounting methods; the fair value and average expected life of acquired intangible assets and the method by which assets were acquired; the amortization of intangible assets obtained in acquisitions are not considered a key measure in comparing our operating performance.

We use Adjusted EBITDA:

  • As a measure of operating performance;
  • For planning purposes, including the preparation of budgets and forecasts;
  • To allocate resources to enhance the financial performance of our business; and
  • To evaluate the effectiveness of our business strategies.

Adjusted EBITDA does not purport to be an alternative to net income (loss) or cash flows from operating activities. The term Adjusted EBITDA is not defined under GAAP, and Adjusted EBITDA is not a measure of net income (loss), operating income or any other performance or liquidity measure derived in accordance with GAAP. Therefore, Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

  • Adjusted EBITDA does not reflect all cash expenditures, future requirements for capital expenditures or contractual commitments;
  • Adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs; and
  • Adjusted EBITDA does not reflect the interest expense on our debt or the cash requirements necessary to service interest or principal payments.

In addition, Adjusted EBITDA can differ significantly from company to company depending on strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. We compensate for these limitations by relying also on the GAAP results and using Adjusted EBITDA as supplemental information.

Set forth below is a reconciliation of net income (loss) to Adjusted EBITDA for the three and six months ended June 30, 2018 and 2019: 

  Three Months Ended   Six Months Ended
  June 30,   June 30,
    2018       2019       2018       2019  
  (In thousands)
Net income (loss) $   (7,656 )   $   3,102     $   (19,710 )   $   274  
Interest income    (235 )     (339 )     (377 )     (536 )
Interest expense   18,212       14,424       32,484       27,283  
Income tax expense   746       1,425       1,922       204  
Amortization of debt financing costs   929       782       1,888       1,564  
Intangible amortization   22,290       31,221       41,784       59,962  
Depreciation and other amortization    2,162       2,425       4,044       4,738  
Non-cash equity compensation expense    3,701       5,178       7,555       9,099  
Non-cash changes in fair value of estimated
  contingent consideration
  11,944       3,847       18,315       11,261  
Gain on sale of investment                (5,509 )      
Loss on extinguishment of borrowings                14,011        
Other expense (income), net   (203 )     468       (296 )     704  
Management contract buyout                     1,428  
Other one-time transaction expenses         420             1,486  
Adjusted EBITDA  $   51,890     $   62,953     $   96,111     $   117,467  
               


 

Adjusted Net Income and Adjusted Net Income Per Share

We analyze our performance using Adjusted Net Income and Adjusted Net Income Per Share. Adjusted Net Income and Adjusted Net Income Per Share are non-GAAP measures. We define Adjusted Net Income as net income (loss) excluding income tax expense (benefit), amortization of debt financing costs, intangible amortization and impairments, if any, non-cash equity compensation expense, non-cash changes in fair value of estimated contingent consideration, gain on sale of investment, loss on extinguishment of borrowings,  management contract buyout, if any, and other one-time transaction expenses. The calculation of Adjusted Net Income also includes adjustments to reflect (i) a pro forma 27% income tax rate assuming all earnings of Focus LLC were recognized by Focus Inc. and no earnings were attributable to non-controlling interests and (ii) tax adjustments from intangible asset related income tax benefits from acquisitions based on a pro forma 27% tax rate.

Adjusted Net Income Per Share for the three and six months ended June 30, 2019 is calculated by dividing Adjusted Net Income by the Adjusted Shares Outstanding. Adjusted Shares Outstanding for the three and six months ended June 30, 2019 includes: (i) the weighted average shares of Class A common stock outstanding during the periods, (ii) the weighted average incremental shares of Class A common stock related to stock options and unvested Class A common stock, if any, outstanding during the periods, (iii) the weighted average number of Focus LLC common units outstanding during the periods (assuming that 100% of such Focus LLC common units have been exchanged for Class A common stock) and (iv) the weighted average number of common unit equivalents of Focus LLC vested and unvested incentive units outstanding during the periods based on the closing price of our Class A common stock on the last trading day of the periods (assuming that 100% of such Focus LLC common units have been exchanged for Class A common stock).

Adjusted Net Income Per Share for the periods prior to July 30, 2018 is calculated by dividing Adjusted Net Income by the Adjusted Shares Outstanding. Adjusted Shares Outstanding for the periods prior to July 30, 2018 was 71,843,916 and includes all vested and unvested shares of Class A common stock issued in connection with the IPO and Reorganization Transactions, assumes that all vested non-compensatory stock options and unvested compensatory stock options outstanding at the closing of the IPO have been exercised (assuming vesting of unvested compensatory stock options and a then-current value of the Class A common stock equal to the $33.00 IPO price) and assumes that 100% of the Focus LLC common units and vested and unvested incentive units outstanding at the closing of the IPO have been exchanged for Class A common stock (assuming vesting of the unvested incentive units and a then-current value of the Focus LLC common units equal to the $33.00 IPO price).

We believe that Adjusted Net Income and Adjusted Net Income Per Share, viewed in addition to and not in lieu of, our reported GAAP results, provide additional useful information to investors regarding our performance and overall results of operations for various reasons, including the following:

  • Non-cash equity grants made to employees or non-employees at a certain price and point in time do not necessarily reflect how our business is performing at any particular time; stock-based compensation expense is not a key measure of our operating performance;
  • Contingent consideration or earn outs can vary substantially from company to company and depending upon each company’s growth metrics and accounting assumption methods; the non-cash changes in fair value of estimated contingent consideration is not considered a key measure in comparing our operating performance; and
  • Amortization expenses can vary substantially from company to company and from period to period depending upon each company’s financing and accounting methods, the fair value and average expected life of acquired intangible assets and the method by which assets were acquired; the amortization of intangible assets obtained in acquisitions are not considered a key measure in comparing our operating performance.

Adjusted Net Income and Adjusted Net Income Per Share do not purport to be an alternative to net income (loss) or cash flows from operating activities. The terms Adjusted Net Income and Adjusted Net Income Per Share are not defined under GAAP, and Adjusted Net Income and Adjusted Net Income Per Share are not a measure of net income (loss), operating income or any other performance or liquidity measure derived in accordance with GAAP. Therefore, Adjusted Net Income and Adjusted Net Income Per Share have limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

  • Adjusted Net Income and Adjusted Net Income Per Share do not reflect all cash expenditures, future requirements for capital expenditures or contractual commitments;
  • Adjusted Net Income and Adjusted Net Income Per Share do not reflect changes in, or cash requirements for, working capital needs; and
  • Other companies in the financial services industry may calculate Adjusted Net Income and Adjusted Net Income Per Share differently than we do, limiting its usefulness as a comparative measure.

In addition, Adjusted Net Income and Adjusted Net Income Per Share can differ significantly from company to company depending on strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. We compensate for these limitations by relying also on the GAAP results and use Adjusted Net Income and Adjusted Net Income Per Share as supplemental information.


Set forth below is a reconciliation of net income (loss) to Adjusted Net Income and Adjusted Net Income Per Share for the three and six months ended June 30, 2018 and 2019: 

  Three Months Ended   Six Months Ended
  June 30,   June 30,
    2018       2019       2018       2019  
  (In thousands, except share and per share data)
Net income (loss) $   (7,656 )   $   3,102     $   (19,710 )   $   274  
Income tax expense   746       1,425       1,922       204  
Amortization of debt financing costs   929       782       1,888       1,564  
Intangible amortization    22,290       31,221       41,784       59,962  
Non-cash equity compensation expense   3,701       5,178       7,555       9,099  
Non-cash changes in fair value of estimated
  contingent consideration
  11,944       3,847       18,315       11,261  
Gain on sale of investment               (5,509 )      
Loss on extinguishment of borrowings               14,011        
Management contract buyout                     1,428  
Other one-time transaction expenses (1)         420             1,486  
  Subtotal  $   31,954     $   45,975     $   60,256     $   85,278  
Pro forma income tax expense (27%) (2)   (8,628 )     (12,413 )     (16,269 )     (23,025 )
Tax Adjustments (2) (3)   5,686       7,670       10,481       14,693  
Adjusted Net Income $   29,012     $   41,232     $   54,468     $   76,946  
Adjusted Shares Outstanding (4)    71,843,916        74,444,102        71,843,916        74,422,405  
Adjusted Net Income Per Share  $   0.40     $   0.55     $   0.76     $   1.03  
               
Calculation of Adjusted Shares Outstanding:              
Weighted average shares of Class A common stock              
outstanding—basic (5)         46,696,200             46,455,238  
Adjustments:              
Shares of Class A common stock issued in connection with   42,529,651             42,529,651        
the IPO and Reorganization Transactions (6)      
Weighted average incremental shares of Class A common         25,359             16,607  
stock related to stock options and unvested Class A      
common stock (7)      
Weighted average Focus LLC common units outstanding (8)   22,499,665       22,488,713       22,499,665       22,635,388  
Weighted average common unit equivalent of Focus LLC              
incentive units outstanding (9)   6,814,600       5,233,830       6,814,600       5,315,172  
Adjusted Shares Outstanding (4)    71,843,916        74,444,102        71,843,916        74,422,405  
               

 

  1. Relates to one-time expenses related to (a) Loring Ward severance cash compensation of $280 during the three months ended March 31, 2019, which were recorded in compensation and related expenses and (b) transaction expenses of $786 and $420, associated with the acquisition of Loring Ward, which were recorded in selling, general and administrative expenses during the three months ended March 31, 2019 and June 30, 2019, respectively.
  2. For periods ended prior to the closing of the IPO and the consummation of the related reorganization transactions on July 30, 2018, these adjustments are being made for comparative purposes only.
  3. As of June 30, 2019, estimated tax adjustments from intangible asset related income tax benefits from closed acquisitions based on a pro forma 27% tax rate for the next 12 months is $30,769.
  4. For historical periods prior to the closing of the IPO and consummation of the related reorganization transactions on July 30, 2018, the Adjusted Shares Outstanding are deemed to be outstanding for comparative purposes only.
  5. Represents our GAAP weighted average Class A common stock outstanding–basic.
  6. The issuance of Class A common stock that occurred upon closing of the IPO and the consummation of related reorganization transactions on July 30, 2018 is assumed to have occurred as of January 1, 2018 for comparative purposes.
  7. The incremental shares for the six months ended June 30, 2019 related to unvested Class A common stock as calculated using the treasury stock method were not included in the calculation of the GAAP weighted average shares of Class A common stock—diluted as the result would have been anti-dilutive.
  8. Assumes that 100% of the Focus LLC common units were exchanged for Class A common stock.
  9. Assumes that 100% of the vested and unvested Focus LLC incentive units were converted into Focus LLC common units based on the closing price of our Class A common stock at the end of the respective period and such Focus LLC common units were exchanged for Class A common stock. For the periods ending prior to July 30, 2018, the conversion to Focus LLC common units was based on the $33.00 IPO price.


Supplemental Information

Economic Ownership

The following table provides supplemental information regarding the economic ownership of Focus Financial Partners, LLC, as of June 30, 2019:

  As of June 30, 2019
Economic Ownership of Focus Financial Partners, LLC Interests: Interest   %
Focus Financial Partners Inc. (1)   47,116,817   63.2 %
Non-Controlling Interests (2)   27,434,034   36.8 %
Total   74,550,851   100.0 %
       

 

  1. Includes 118,169 unvested common units.
  2. Includes 5,125,588 Focus LLC common units issuable upon conversion of the outstanding 17,830,564 vested and unvested incentive units (assuming vesting of the unvested incentive units and a June 30, 2019 period end value of the Focus LLC common units equal to $27.31).

Class A and Class B Common Stock Outstanding

The following table provides supplemental information regarding the Company’s Class A and Class B common stock:

  Q2 2019 Weighted Average Outstanding Number of Shares Outstanding at
June 30, 2019
Number of Shares Outstanding at August 5, 2019
Class A 46,696,200 47,116,817 47,116,817
Class B 22,488,713 22,308,446 22,308,446

Incentive Units

The following table provides supplemental information regarding the outstanding Focus LLC vested and unvested Incentive Units (“IUs”) at June 30, 2019. The vested IUs in future periods can be exchanged into shares of Class A common stock (after conversion into a number of Focus LLC common units that takes into account the then-current value of common units and such IUs aggregate hurdle amount), and therefore, the Company calculates the Class A common stock equivalent of such IUs for purposes of calculating Adjusted Net Income per Share.  The period-end share price of the Company’s Class A common stock is used to calculate the intrinsic value of the outstanding Focus LLC IUs in order to calculate a Focus LLC common unit equivalent of the Focus LLC IUs.  

 Focus Financial Partners, LLC Incentive Units by Hurdle at June 30, 2019:

             
   Hurdle Rates   Number Outstanding         
  $   1.42   175,421        
      5.50   97,798        
      6.00   56,702        
      7.00   482,545        
      9.00   2,001,982        
      11.00   1,271,965        
      12.00   520,000        
      13.00   842,418        
      14.00   56,205        
      16.00   168,552        
      17.00   80,000        
      19.00   865,731        
      21.00   3,975,500        
      22.00   1,289,667        
      23.00   524,828        
      27.00   29,484        
      28.50   1,646,766        
      33.00   3,715,000        
      36.64   30,000        
    17,830,564